Why oil demand seasonality affects tanker stocks

Because oil shipments depend on the world’s economy and oil consumption, global oil demand has an impact on tanker business. When oil demand picks up, tanker companies benefit, as countries in the Americas, Europe, and Asia ask for more oil. However, when oil demand falls, it will negatively impact the oil shipping business by bringing shipping rates down.

According to the EIA (Energy Information Agency), oil consumption is expected to increase to 90.5 million barrels per day in the third quarter and 90.8 million in the fourth quarter, up from 89.5 million in the second quarter. Improvements in the global economy, from Europe to Asia to the United States, are the first reason for the 1.0% to 1.3% higher oil demand. The second reason is seasonality. As we approach the cold winter once more, people will start using heating oil to keep buildings warm. As a result, oil demand picks up. Although seasonality has fallen because people now also use cars to travel during the summer, it still is significant.

This also reflects in the Baltic Dirty Tanker Index, which depicts the price of shipping oil across the ocean in the spot market. Based on the past four years of data, tanker rates have historically shown a tendency to increase from September to January, while other months tend to be weak.

Interestingly enough, tanker companies have historically performed badly during the third quarter and for most of the fourth quarter—despite increases in oil demand during the third and fourth quarters (see the first chart above). While possible explanations are numerous, including summer market sell-offs and negative market sentiment, the maturity of time charter contracts are the likely reason for this pattern. Although time charter contracts can support companies to earn higher rates when the market rates for shipping oil fall, revenue will fall when these valuable contracts mature.

So, while the 1.0% to 1.2% increase in oil demand due to seasonality is positive for tanker stocks such as Tsakos Energy Navigation Ltd. (TNP), Teekay Tankers Ltd. (TNK), Frontline Ltd. (FRO), and Nordic American Tanker Ltd. (NAT)—as several companies have noted in their second quarter earnings presentations—it’s questionable whether oil demand will be the catalyst for higher share prices throughout the rest of 2013.

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